Entrepreneurs: Pays to know partners

As 80 startups begin building businesses at the prestigious Y Combinator accelerator this month, there’s a notable difference in the makeup of the teams.

There are only a few founders or founding teams without a history of working together.

That’s because the Silicon Valley accelerator’s investment partners have seen too many teams without time-tested relationships fail.

“If a relationship doesn’t start off naturally, it often doesn’t work,” says Jessica Livingston, the Y Combinator partner who is making it her personal mission to improve the quality of founding teams before they enter accelerators or raise funds.

Livingston’s observations run counter to some aspects of the global startup movement.

The popular “Startup Weekend” event, when people interested in entrepreneurship come together to dream up businesses for a weekend, advertises itself as a place to meet a co-founder. In many cases, that’s a person with the technical skills to make a technology business come to life. Tens of thousands of people participate in these events every year.

What’s wrong with that scenario? It’s all too common, Livingston says, to have a founder partnered with an acquaintance with the required skills. When their startup is faced with a big strategic decision – an industry to target, partnership deal to sign, leadership roles to assume or a potential sale opportunity – they disagree on business goals and become paralyzed by the decision. Many startups are doomed because of it.

Take Kathryn Minshew’s first startup, a career development and search platform for women. A McKinsey consultant, she partnered with three colleagues with whom she had little history. When traffic to the site began to accelerate quickly and strategic decisions had to be made, there were arguments about nearly every one of them.

“The early days of a startup can be so pie-in-the-sky that it can be easy to overlook or ignore really small warning signs that you might have differences,” Minshew says.

Today, she’s running New York career and job search startup The Muse with one of her original co-founders. Now, they have history. They got through that horrible experience together.

And The Muse is thriving. It reaches more than a million Millennials every month and is matching those young people with jobs at about 200 businesses – from Uber to NPR to Facebook to the U.S. Department of Labor.

How can entrepreneurs avoid picking the wrong partners?

First, scan your network of friends and close work colleagues. If need be, attend a networking event. Find someone with skill sets that complement your own, preferably who you know well or a referral from someone you trust.

Livingston suggests first working on something small or meaningless together to see how the relationship works. Then, as a trial period, advance into a contractor relationship for a month or two to begin work on your startup idea. Don’t award stock to the person once the trial period is over.

Be open and honest with your co-founder about your goals for the company. Make sure the person knows that success may take years. Compensate fairly – offer half or close to half of the company’s shares if you’re asking for a five-year commitment. A red flag, Livingston says, is a founder with 90 percent of shares and a co-founder with 10 percent.

Livingston and Minshew both recommend partners sign a legal contract that anticipates problems. What happens if someone isn’t performing or a difficult family situation arises or an intriguing acquisition offer arrives? A document that sets the expectations for the company is the best way to avoid a nasty fallout.

Livingston is practicing what she preaches. Beginning this summer, Y Combinator asks founders to review a “founder ethics” statement.

Among the promises it asks founders to keep are that they’ll be honest and treat their co-founders with fairness and respect, and honor “handshake deals.”

“It’s probably the most important decision for your startup, even more than your idea in some cases,” Livingston says. ■